We are writing to put some context around the news that continues to evolve regarding the coronavirus outbreak. With stock markets having sold off materially earlier this week, the immediate impact to portfolios is tangible and warrants some communication. That being said, we want to be careful not to distance ourselves from the humanity of the world around us. Our thoughts are first and foremost with the families that have been impacted by this most recent outbreak. 

We use a similar formula to think through this event as we would others like it: What do we know and what don’t we know? What impact could these knowns and unknowns have on fundamental drivers of long-term value? Based on this, what actions should we take? 

Most recently, the markets are reacting to a spike in the number of cases outside of China and therefore stoking concerns that we could see a prolonged impact to the global economy. To date, according to the World Health Organization, there have been over 78,000 confirmed cases worldwide and an estimated death toll of just below 2,500. While over 97% of the cases and deaths worldwide have been concentrated in China, the recent spread to countries like Italy and Iran have broadened concerns that the global impact could be more broad-based. To put these numbers into perspective, the Centers for Disease Control and Prevention estimates that just over 8,000 people became sick with SARS during the 2003 outbreak, of which 774 people died. On the one hand, we can see the extent of the spread of the coronavirus is much more significant, though on the other hand, to date, the virus has proved to have a much lower mortality rate than SARS. 

We have started to see the impact of this event trickle into company guidance and estimates. Notably, Apple sent out an investor update on February 17th in which they indicated that they might have difficulty reaching their revenue guidance for Q1 that they had announced just a few weeks earlier. This marks one of the highest profile announcements from a company and exemplifies the truly global nature of the supply chain. Global manufacturing activity, as measured by PMIs, showed no ill effects in January, the one notable exception being China. According to the National Bureau of Statistics, China’s Industrial PMI dipped by 0.2% in January to a reading of 50. It is entirely possible that we will see further deterioration of data in February as Apple noted their progress in relaunching production in China was slower than anticipated. 

Investors are rightly grappling with whether the impact of the virus will be transitory—and therefore recoverable—as well as with how large of an impact it could be and whether that could tip the global economy into recession. While history in no way predicts the future, and each outbreak is unique, most of the historical data implies that the true impact to earnings and economic fundamentals are near-term and cyclical. For example, in 2003 during the SARS outbreak, according to the National Bureau of Statistics, Chinese GDP grew approximately 12.9%, compared to 9.7% in 2002—which would imply minimal impact on the economy as a whole. That said, GDP growth quarter to quarter that year saw a material impact, with growth dropping from 13.4% in Q1 2003 to 11.5% in Q2 2003, and then moving back to 12.9% in Q3 2003 and 13.7% in Q4 2003. 

So, are concerns entirely overblown this time around? While historical precedent seems to imply a quick rebound, in all fairness, things are a little different this time. For one, China’s share of world GDP has more than doubled since 2003, so any slowdown in China will reverberate more significantly across the world economy. From a stock market perspective, China’s weighting within the global stock market has also increased, though it is worth noting that it still only represents 5% of the MSCI All Country World Index—one of the broadest measures of the world stock market. Lastly, while significantly harder to quantify, the impact on the flow of the supply chain has and could continue to result in further earnings revisions downward. In other words, while we may come to find out that the market has overreacted (as it can do sometimes), it is not for lack of reason.  

Ultimately, the question comes down to time frame. If we were near-term market timers, we could make the argument that things could get worse before they get better. If history is any indication, the markets tend to sell off dramatically and then rally dramatically as the number of new cases plateau and the outbreak comes under control. In that scenario, the challenge for investors is two-fold: 1) they need to know when to get out and 2) they need to know when to get back in. When you add in the tax factor, and the reality that in most cases it costs money to make the aforementioned trades, it starts to seem less and less reasonable to take action at this time. In the short run, it is certainly the case that infections spreading across the globe would have an impact on consumer behaviors and be disruptive to the supply chain. In the long run, however, we do not believe that the recent outbreak has changed the longterm outlook for the investments we own. Warren Buffet was asked for his take on the coronavirus in a CNBC interview Monday morning and while not surprising, his response is worth reflection: “We’re buying businesses for 20 or 30 years, we think the 20- and 30-year outlook is not changed by the coronavirus.”  

We will continue to monitor this situation closely, but given what we know currently, we believe that holding the course makes the most sense. If anything, we’re always on the lookout for opportunities to buy good assets at cheaper prices, so if the sell-off intensifies, we are more likely to look to be buyers than sellers and to seek opportunities to rebalance. Despite recent events, we continue to have confidence in the long-term value of the assets in which Matter Families are invested. We value the trust our families place in us to manage their investment portfolios and are always looking for opportunities to communicate our point of view—particularly during these periods of uncertainty and concern.


This report is the confidential work product of Matter Family Office. Unauthorized distribution of this material is strictly prohibited. The information in this report is deemed to be reliable but has not been independently verified. Some of the conclusions in this report are intended to be generalizations. The specific circumstances of an individual’s situation may require advice that is different from that reflected in this report. Furthermore, the advice reflected in this report is based on our opinion, and our opinion may change as new information becomes available. Nothing in this presentation should be construed as an offer to sell or a solicitation of an offer to buy any securities. You should read the prospectus or offering memo before making any investment. You are solely responsible for any decision to invest in a private offering. The investment recommendations contained in this document may not prove to be profitable, and the actual performance of any investment may not be as favorable as the expectations that are expressed in this document. There is no guarantee that the past performance of any investment will continue in the future.